Setting up a business can be quite risky especially when you decide to do it with other people. These “other people” are the shareholders of your company or the people who own shares with the company. When the shareholders are your friends or your family members, you might immediately assume that nothing will go wrong and that everything will go as planned. However, you should never be too complacent. Family member or not, you want to protect yourself as well as the welfare of your business by securing a shareholders agreement. You may also see sample payment agreements.
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This article will discuss to you why there is a need for you to come up with a shareholders agreement and, of course, what this agreement is all about. We even have a couple of sample shareholder agreements that you can use as reference once you start writing your very own agreement. You can find these samples as well as more information about this topic down below. Keep scrolling!
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What Is a Shareholders Agreement?
A shareholders agreement is basically a general agreement between the shareholders of a company. The agreement can either apply to all of the shareholders or only some of the shareholders. The main purpose of this agreement is to protect the investments made by each shareholder covered by the agreement, to establish the relationship and the obligations of the shareholders, as well as how should each shareholder run the company. It also provides information about the stocks shares that will be issued.
The best time to secure a shareholders agreement is the moment that you start setting up your business as well. This way, you will also be able to give the shareholders a good expectation about what the business will be and what are possible expansion plans that could occur in the future and how it will affect the shareholders. You might find that you might all not be on the same page regarding matters related to the business. Try to negotiate as much as possible until you reach a mutual agreement while still retaining the core value of the business.
You might find our business agreement samples of use for matters about setting up a business.
What to Include in a Shareholders Agreement?
What you include in your shareholders agreement may differ from another business’s shareholders agreement. Remember, different businesses have different needs and different requirements, which could be the reason for the difference. However, you might also find that there are a couple of similarities such as the following:
1. Issuance of shares and transferring the shares. The provisions for this will usually discuss how to prevent third parties from acquiring shares as well as how shareholders can sell their shares should there be a need for them to do so. You may also see professional services agreement templates.
2. Protection of shareholders. This can be provisions that will state that decisions will be made by all the shareholders, whatever the amount of investments they have made.
3. Govern how the company is run. Delegating what the roles and responsibilities of each shareholder is also an important aspect. This can include
- assigning or appointing persons to certain positions,
- removing directors,
- paying directors,
- providing pertinent information to the shareholders,
- banking procedures, and
- company financing processes.
These are just some of the common things that you will find in a shareholder agreement. Some of the provisions that you might include will overlap with that of other pertinent company documents. However, you must ensure that what overlaps is consistent and is not going to cause any confusion. You may also like sample business investment agreements.
If you are unsure about what you should put in your shareholders agreement, do not hesitate to ask for legal advice from any knowledgeable attorney to ensure that your agreement ends up being successfully written.
You may want to check out Contract Agreement Formats for more information.
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Drafting a Shareholders Agreement
Shareholders agreements should always be tailored to fit the needs and the requirements of a business. However, boilerplate should still be included such as roles and responsibilities, state laws that will govern the agreement, restrictions, share transfers, as well as how to assign directors or other pertinent figures for the company. You might also be interested in joint venture agreements.
This section will discuss with you a couple of things that will definitely help answer the question about how to write a shareholders agreement.
1. Establish the Company
- Define the parties involved with the agreement. This includes shareholders and other people who are considered to be involved with the company. Make sure to take note of the following:
- Make use of a unanimous shareholders agreement if you are a new company with a couple of shareholders. This shareholders agreement will require all shareholders to become parties of the agreement. You may also see sample blanket purchase agreements.
- It is preferable to secure a shareholders agreement despite the fact that it could be a bit difficult for companies to have all of the shareholders sign the agreement.
- Provide definitions of the terms that will be used. This will help the readers to specify the legal terms that were used in the agreement. This will include terms such as
- share ration, and
- director’s resolution.
- Define the structure of the company. A good definition about the structure of your business is of high importance for shareholders agreements. It may address the following:
- Board of Directors
- The number of directors
- Initial directors
- Frequency of board meetings
- Choosing board member processes
- Voting preferences
- Company Officers
- The number of officers
- Initial officers
- Designated titles
- Officer compensation
- The roles and responsibilities of the company officers regarding how they should govern the company should also be outlined in the provisions regarding the structure of the company. You may want to take a look at general employment agreements.
- Board of Directors
- Describe the procedural rules. This defines the rules that the company directors and officers should follow while involved with the agreement. This could include
- procedures for conducting board meetings,
- how often should board meetings be, and
- the quorum or minimum number of directors and officers needed for the meeting to push through.
You may also like sample child support agreement templates.
2. Rights and Obligations
- Describe observer rights. These rights in particular allow investors and parties not involved with the board to observe the board meetings and receive the same information that is exclusive for the members of the board. Provisions regarding observer rights should be duly stated in the agreement as well. Observer rights are typically given to investors who gave a significant amount of capital for the business. You may also see sponsorship agreements.
- Outline the rights and obligations of the shareholders. This will include the following:
- Financial obligations of the shareholders
- Handling breach, death, or incapacity of a shareholder
- Exercising veto rights (if any)
- Decisions that require approval of all the shareholders
- Resolving disputes among shareholders
- Commitments required from the shareholders
- Information that can be accessed by the shareholders
- Refusal rights for share transfers
- Outline corporation rights and obligations. This may include the following:
- Delivery of reports such as quarter and annual reports to shareholders
- Release of financial statements to the shareholders
- Liability insurance information
3. Share Restrictions
- Describe when shares will be considered valid for transfers. Typically, a shareholders agreement will outline that shares are not valid for transfer. However, it will also detail the situations that will call for the validity of shares for transfer. This will provide flexibility both for the company and the shareholders. You may also see sample memorandum of agreement templates.
- Corporate repurchase. When a stockholder dies, becomes incapacitated, gets divorced, or becomes insolvent, the company may repurchase the stocks that was left. Make sure that provisions regarding repurchasing stocks are clearly stated in the agreement to ensure that confusion will be avoided at all times. You may also like sample downloadable sales agreement templates.
- Co-sale and tagalong. This helps to protect minority shareholders. This will typically state that if majority shareholders want to sell their shares, the minority shareholders may choose to include theirs or, in other words, tag along with the sale. You may also check out sample settlement agreements.
- Drag-along rights. This provision will help to protect the shareholders who are looking for better deals regarding the sale of shares once majority shareholders agree to do so.
More about writing agreements can be found by reading our article about how to write a contract agreement.
We hope that you learned a lot from reading this article. Do not forget to always seek the help of legal bodies should you find yourself having difficulties about writing your very own shareholders agreement. If you wish to find more agreement samples, you can check out Sample Agreements in PDF.
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